Commentary

Fitch affirms Malta - the jurisdiction of choice for QROPS - at "A" with outlook stable

Ratings agency Fitch have confirmed Malta's outlook as stable and its economy as sound. Our Head of International Pensions says this confirms why Malta is the jurisdiction of choice for QROPS.

Fitch Ratings has affirmed Malta's long-term foreign and local currency issuer default rating (IDRs) at 'A'. The outlooks are Stable. The issue ratings on Malta's senior unsecured foreign and local currency bonds have also been affirmed at 'A'.

The agency also affirmed Malta's short-term foreign-currency IDR at 'F1' and the country ceiling at 'AAA'.

Fitch said the Maltese economy was outperforming its eurozone peers. It estimated real GDP grew by 3.4 per cent in 2014, better than in 2013 (2.5 per cent) and higher than both the eurozone average (0.9 per cent) and the 'A' median of 3.1 per cent over five years.

Fitch expected potential growth to average 3 per cent in 2015-16, continuing above the eurozone average.

The agency expected domestic demand to be the main engine of growth. Private consumption would be supported by a moderate increase in real disposable income, underpinned by falling energy prices and a buoyant labour market.

Private investment was supported by the construction of a new power plant. A weaker euro was expected to support exports of goods and services. At 5.9 per cent in December, the unemployment rate was below both the 'A' median and the eurozone average, while the employment rate rose, underpinned by the increasing female labour market participation rate.

Public finances remained weaker relative to the 'A' median but were improving.

Fitch estimated that in 2014 the general government deficit declined to 2.3 per cent of GDP from 2.7 per cent in 2013. This was the result of revenue growth outstripping expenditure growth.

Stronger revenues contrasted with rising expenditure, reflecting significant underlying pressures. Public finances would follow a similar path in 2015.

The budget remained reliant on revenue-increasing measures, while an array of social measures were likely to further increase government spending.

Fitch expected the revenue-to-GDP ratio to increase by 1%, which would likely outstrip the increase in expenditure-to-GDP (0.7% of GDP). Nominal GDP growth of 4.8% would support deficit reduction.

The agency noted that continued rises in public expenditure could pose a risk to debt reduction if revenues underperformed in the future.

General government gross debt (GGGD) was forecast to have declined to 68.8% of GDP in 2014 from 69.5% in 2013. The decline was underpinned by a repayment of arrears by Enemalta, the public energy utility, and a primary budget surplus of 0.4% of GDP.

However, Fitch pointed out that the government’s deal with Shanghai Electric Power Company reportedly had the potential to enhance Enemalta's profitability over the medium term and reduce its debt.

A successful restructuring would likely reduce risks around the crystallisation of contingent liabilities.

Fitch also noted that the three Maltese banks directly subjected to the ECB's Comprehensive Assessment passed it unscathed.

The agency said that future developments that could individually or collectively, result in a downgrade included significant slippage from fiscal targets leading to deteriorating public debt dynamics, crystallisation of material contingent liabilities from public sector companies (particularly Enemalta) and a shock to the banking sector or eurozone bail-out packages.

The main factors that individually or collectively could trigger positive rating action were an improved track record in consolidating the public finances that led to a significantly lower public debt level and a significant decline in contingent liabilities.

Read more about Malta as a jurisdiction for International Pensions.